The 81% of UK savers who say that they will keep their money in cash1 instead of investing it risk seeing the real value of their savings fall as interest rates are lower and inflation starts to rise.
Weak cash interest rates
Inflation went up from 0.5% to 0.6% earlier in August and the Bank of England lowered the base interest rate. Many banks have responded to this by reducing interest rates on cash accounts, from current accounts to ISAs.
The interest rates on some of the most popular cash accounts have been halved and some banks have started talking about charging customers for having money in their accounts. This makes it more difficult for savers to grow their real wealth.
Many experts predict that inflation could reach 3%2 by the end of 2016, with the average Cash ISA paying just 0.65%3 savers need to start considering alternatives. The Financial Conduct Authority recently warned that interest rates on some cash ISAs are already as low as 0.01%.
Many investors leave their money in cash because they feel that investing in other asset classes is too cumbersome (11% of savers), too difficult to decide what to invest in (18% of savers) or too risky compared to cash (37% of savings).
However, digital wealth managers, such as Moneyfarm, are making investing a lot more simple by offering:
- Top quality and transparent wealth management services that offer competitive returns at a low-cost.
- Properly diversified portfolios across geographies, currencies and asset classes which reduces investors exposure to risk.
The post-Brexit market makes it more difficult to know where to invest so many are choosing to save in cash accounts, but over time that cash is likely to underperform. Conversely, a properly balanced portfolio including bonds and equities should outperform inflation and cash accounts.
Investments can be structured to absorb hits caused by market volatility, such as the recent fall in sterling. Investment portfolios can have both geographic diversity and uncorrelated asset classes, such as fixed-income equities, commodities, and currencies.
Savers may be nervous about investing or think that leaving their money in cash accounts is the easy choice, but in the current climate, cash accounts are a high risk option.
1 Survey of 761 savings / ISA account holders carried out by Atomik research on behalf of Moneyfarm, April 2016.
2 Bank of America Merrill Lynch
3 Bank of England interactive database